10 Reasons It’s Bad to Invest in IPOs

Getting into investments is an exciting prospect. People love the idea of seeing their money turn into something bigger. However, that excitement can also lead to a bad investment that ends up leaving you with emptier pockets than when you started. When this happens, you may want to consider some reasons it's bad to invest in IPOs.

In fact, investing in an Initial Public Offering (IPO) is almost never a good idea. Within this article, we're going to outline things to know before investing in an IPO and what makes it a risky investment.

IPOs are ridiculously expensive.

There are those that believe IPOs are cheap to get into. They think that by getting in "early" they are receiving incredibly lower prices that they can then cash out on later.

However, publicly traded investments almost never happen until after a few private parties have put in money at prices much lower than the ones you are seeing.

In fact, IPOs nearly always have up to four rounds of these private investments in the long term, with the price rising a bit each time. When any stocks hit the public eye, the price is significantly higher than the start.

The real goal of an IPO is for the pre-investors to cash out on the public's money, hence the high prices.

IPO promotion is meant to mislead.

Initial Public Offering salesmen are in place only to convince you to buy any stocks. As they only happen once per company, it's up to these promoters to make it seem like the best thing in the world.

By using buzzwordy terms, these salesmen are able to catch the eye of the general public and convince them to place money into the project. Then, once everybody has thrown in their funds, the pre-investors can simply cash out and be on their way to the next project.

A majority of IPOs don't perform as expected.

Similar to the cryptocurrency industry, people jump into IPOs expecting short-term investments they can make money on in only a couple of months. While this can happen in certain market states, a majority of IPOs don't even make it close to their expected value.

Instead, these values are initially projected incredibly high—usually at a price that doesn't make much sense in the grand scheme of things. Because of this, it can be really hard to tell which is a good investment.

Many IPOs follow the same long term trajectory.

Ideally, most IPOs would offer a unique idea worth investing in. However, this tends not to be the case. In fact, most IPOs are similar to other ideas in the market, preventing them from reaching a very high level of success.

There simply isn't a market for ideas that don't innovate in their respective industries, of which a majority of them are. Nearly all of those IPOs will follow the same path because of this, making it harder to know which is best to invest in.

Hype doesn't equal good investment.

Just because a ton of people are hyped about when a company goes public, that doesn't mean you should buy shares.

Hype does not equal greatness. There are some projects that know how to manipulate their individual investors with words and press releases as well. Plus, just because bankers and IPO investors are a big fan of the idea, this does not mean it will take off in the long run.

IPOs are incredibly risky.

While not every IPO is an unworthy investment, even those that seem like a "safe" investment put off the illusion that they aren't risky. That is simply not the case, as IPOs are one of the most dangerous investments you can make.

There are many high risk and low-risk investments. When it comes to IPOs, they are very risky. It's not very likely that the one you invested in will take off. It's usually not worth the time and money thrown in and probably won't do much to increase your net worth. This is one of the biggest reasons it's bad to invest in IPOs.

Volatility exists.

It can be hard to tell which IPOs are going to be successful in the long run. No matter how many products they sell, it doesn't mean the stock price will necessarily reflect that.

There are companies that seem to be doing great, reporting high numbers and everything. However, it's likely that the company hasn't and will not reach the value IPO investors expected before it became publicly traded. An IPO price will go down regardless, and everyone loses at that point.

Objective research is almost nonexistent.

While there are always analysts looking to cover new and exciting IPO's, it's difficult to provide coverage on private businesses and how they are doing regarding stock price.

Research is almost always going to be opinion based more than anything else, and the lack of facts available means it isn't the best idea to trust those opinions. Sure, they can provide valuable insight, but it's never a good idea to make an investment based on information you can't see yourself.

These businesses are not your friend.

Sometimes, people go into investments believing the company goes public for them. Many IPOs may present themselves like they are for the people and will do whatever they can to make you feel like a valued member.

However, most of the time they are just there for your investment. Be careful when regarding the IPO price. In the business world, you are only as good as your net worth.

Investing in IPOs is not an even playing field.

Small, individual investors are the brunt of the pack. Those investing in IPOs are almost always getting taken advantage of. Private investors are the ones really funding a company, so those are the ones being catered to.

While they make it seem as appealing as possible, IPOs are never looking out for you, especially in the long term. Always keep that in mind when investing.

There you have it. While IPOs may seem enticing, they are designed to appear that way. There are many reasons it's bad to invest in IPOs. You may never actually make a profit on your investment, and it's likely the company won't really ever go anywhere.

Be careful with what you put money into, and don't get screwed over by the fancy wording.